Nonmonetary assets such as inventory or property, plant, and equipment are items whose price may change over time. Controversy exists in regard to the accounting for these
assets when one nonmonetary asset is exchanged for another nonmonetary asset
18. As stated previously, ordinarily companies account for the exchange of nonmonetary assets on the basis of the fair value of the asset given up or the fair value of the asset received, whichever is clearly more evident. Thus, companies should recognize immediately any gains or losses on the exchange. The rationale for immediate recognition is that most transactions have
commercial substance and therefore should be recognized. An exchange as commercial substance if the future cash flows change as a result of the transaction. An exchange of trucks with different useful lives might have commercial substance while an exchange of trucks with no
significant difference in useful lives would probably not.
19. Companies immediately recognize losses they incur on all exchanges. The accounting for gains depends on whether the exchange has commercial substance. If the exchange has
commercial substance, the company recognizes the gain immediately. However, the rule for immediate recognition of a gain when an exchange lacks commercial substance is treated differently. If the company receives no cash (boot) in such an exchange, it defers recognition of a gain. If the company receives cash in such an exchange, it recognizes part of the gain immediately. The portion to be recognized is equal to the ratio of the cash received to the total consideration received times the total gain indicated.
20. To summarize these concepts, when a transaction involves an exchange of nonmonetary
assets, losses are always recognized. Gains are recognized if the exchange has commercial substance. However, gains are deferred (not immediately recognized) if the exchange has no
commercial substance, unless cash or some other form of monetary consideration is received, in which case a partial gain is recognized. Also, a gain or loss on the exchange of nonmonetary assets is computed by comparing the book value of the asset given up with the fair value of that same asset. The examples shown below are designed to demonstrate the various situations where exchanges of nonmonetary assets are included
Commercial Substance, Lacks Commercial Substance—No Cash Received. boot received,
boot paid, Plant assets, property plant and equipment, PP&E, fixed assets, depreciation expense, accumulated depreciation, gain on disposal of plant assets, acquisition cost, land improvement, salvage value, residual value, useful life,